Hovnanian shares fall on liquidity fears

JohnSpence

BOSTON (MarketWatch) -- Shares of Hovnanian Enterprises Inc. lost ground Wednesday after the company said it is negotiating with its lenders to amend covenants related to tangible net worth and that it doesn't plan to pay dividends on its preferred stock in fiscal 2008.

Hovnanian after Tuesday's closing bell reported a widened fourth-quarter loss, as home builders continue in vain to search for a bottom in the residential housing market.

The Red Bank, N.J.-based company
HOV, -4.15%
said its net loss for the period ended in October increased to $466.6 million, or $7.42 a share, from $115.3 million, or $1.88 a share in the same period a year earlier. Meanwhile, revenue fell to $1.39 billion, from $1.75 billion.

"Our industry is currently experiencing a cyclical correction," said Ara Hovnanian, the company's chief executive, in the earnings release.

"While the factors that created this downturn are different than any other throughout our 48-year history, we know that stronger demand for new homes will return," the CEO said. "What is not known is how long the market will take to rebound."

Hovnanian shares dropped 11% to close at $7.44 on Wednesday.

Hovnanian said it incurred a total of $383 million in pretax charges including land and intangible impairments. The company said similar charges in the same period a year earlier totaled $322 million.

Hovnanian booked a $216 million after-tax non-cash charge in the quarter by recording a reserve against its deferred tax assets. The company said its bank group has provided a waiver under its $1.5 billion revolving credit facility as of Oct. 31 for covenants related to tangible net worth that were impacted by the non-cash tax charge.

"We have strong, longstanding relationships with many of the banks in our revolving credit facility, and we have initiated discussions with the bank group to further modify our covenants with respect to future periods," said Chief Financial Officer Larry Sorsby in a statement.

"Based on our initial discussions, we believe that we will be able to successfully negotiate changes that are needed to the credit agreement to adjust for the change in tax treatment, as well as to provide us with adequate operating room as we manage through the remainder of the current housing slowdown," the CFO said. "We expect to close the amendment in January."

Sorsby said the company will not pay dividends on its preferred stock during fiscal 2008.

"The company needs waivers on both its tangible net worth and interest coverage covenants due to the land impairments and negative coverage ratio," wrote Banc of America Securities analyst in a research note Wednesday. "We believe the banks will provide waivers but reduce the availability under its borrowing base and potentially secure the revolver with its assets."

The big story for Hovnanian in the quarter was weaker profit margins and the "plethora of charges," wrote analysts at Wachovia Securities in a report. The tax change "was unexpected and suggests to us that the company will not be profitable for some time to come," they added.

Home-builder blues

Home builders have taken balance-sheet hits to mark down the value of real estate held on the books. This has contributed to liquidity concerns and speculation that some of the more leveraged companies would be forced into bankruptcy before the housing market turned. Hovnanian has been using cash flow to pay down its debt.

Meanwhile, the turmoil in mortgage and credit markets has further sapped housing demand as mortgages become more difficult to secure and more buyers back out of contracts. Some fear that a rush of foreclosures triggered by adjustable-rate mortgage resetting higher this year would only delay a housing recovery.

Last month, when Hovnanian released preliminary fourth-quarter results, it said net contracts in the company's fourth quarter dropped 10% from a year earlier, saying its October sales pace in most markets "significantly deteriorated" in relation to recent months.

Hovnanian delivered 19% fewer homes during the October quarter compared to the year-earlier period. The cancellation rate rose quarter-over-quarter to 40% of gross contracts, up from 35%.

Heading into Wednesday's trading session, Hovnanian shares were down more than 75% so far this year, falling harder than the broader home-builder group. The housing downturn has been particularly cruel to builders like Hovnanian with significant operations in hard-hit Florida and California

In September, Hovnanian ran a national weekend sales campaign called "Deal of the Century" that featured deep price discounts and concessions.

Ara Hovnanian, the company's CEO, at an investment conference last month said U.S. housing won't likely get back to a "balanced marketplace" until 2010. Meanwhile, 2008 will be "another challenging year" and he was not looking for strong earnings from home builders.

"By the tail end of 2008 we should get some positive momentum in sales, setting up a recovery in 2009," Hovnanian said. Home builders by then should return to profitability, although earnings will be more meager than the recent boom years, the CEO said.

More negative news hit the housing market this week.

New construction of single-family homes slowed to the weakest pace in 16 years in November as U.S. residential builders scrambled to reduce their inventories of unsold homes, the Commerce Department reported Tuesday. See Economic Report.

On Monday, the National Association of Home Builders reported builder sentiment remained at anemic levels in December, stalling at a record low for the third straight month. See full story.

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